European Energy Infrastructure: Blowing in the Wind
Gale economic winds may be blowing away hopes for Europe’s energy infrastructure, which is in dire need of massive investments.
As attendees at the European Autumn Gas Conference in Paris, France heard, there’s much concern for the sector in the wake of the global economic crisis; the present euro crisis certainly isn't helping matters.
Conference Chair James Ball, Director at Gas Strategies, opened up the first session: “What is the current financial climate for European energy?”
As an example of the uncertainties facing Europe’s energy industry, he noted that “Up to the 10th of March, there was going to be a nuclear renaissance - until Fukushima happened.”
Then, he said, there was the “dog that didn’t bark in the night.”
“Despite shale and huge volumes of LNG, it did not turn into a buyers' market.”
“There are trends going on,” explained Ball. “One accelerated: the trend of shale gas; there were the huge appetites, in particular of governments of Europe, to dip into pockets of citizens to develop renewables, that is a trend that is beginning to run out of puff. This is coupled with the fragility of the financial climate.”
To provide his perspectives on these issues, Jean-Francois Cirelli, Vice Chairman and President, GDF Suez, took to the stage.
“We are experiencing a crucial moment,” he said. “The fundamentals have evolved since we met last year in Berlin. There are a number of uncertainties that we have to face today, regarding the future of natural gas demand in Europe, like slow growth; development of natural gas markets; the issue of bundled products is a source of concern; and ever more stringent and often conflicting regulations increases uncertainty. There is also uncertainty on the level of CO2 prices and allowances - the price has never been so low.”
Despite these it was fair to say, he said, that the industry had also contemplated positives. Mr. Cirelli spoke of the drivers of European energy policy: climate change challenges, security of supply and affordability.
“Security of gas supply has advanced across Europe,” he said, noting that Italy had not suffered lack of supply despite the shut down of supplies from Libya.
According to him, a lack of visibility was what was hindering investment in the European energy sector, and the ability of industry to be able to implement policy was of concern.
“In 2005 the cost of implementing these policies was not an issue, but today governments find these costs very high, during extreme financial and economic instabilities across Europe.”
He said those would clearly impede the natural gas industry’s ability to invest in Europe. “We need more stability and long term visibility.”
Of natural gas, Mr. Cirelli said: “It is the most efficient solution. Natural gas replacing coal plants could result in significant reductions in CO2, and natural gas is affordable. We must ensure that natural gas maintains its competitive advantage.”
The spread between the oil index and natural gas prices in Europe continued to be a concern, he said, noting that the de linking persisted because of the high price of oil.
“We do not believe that the world of shale gas will become as important as in the US in the short to mid term,” he explained, saying that other conventional sources would make a more significant contribution to Europe’s natural gas needs.
“Shale gas is clearly good news for the industry, but there is the issue of acceptability; we therefore need to communicate a lot about the concerns of fraccing - this must be answered by the industry to assuage the environmental fears.”
GDF, he said, was a firm believer in the role that natural gas could play, and wanted to remain a reference player in Europe all along the value chain. He mentioned the enterprise’s production fields in Norway, and that it had made a significant discovery in Azerbaijan with Total.
Mr. Cirelli concluded, “The industry must remain united in promoting natural gas for security of supply and environmental benefits.”
Silvia Beyer, Policy Officer, European Commission Internal Market IN: Networks & Regional Initiatives, spoke of challenges on the investment front, like where the financing to deliver Europe’s energy infrastructure would come from.
She said that some EUR 200 billion were needed for such investments.
“Can the industry deliver this, and what is the market price going to be?” she asked.
“We need to see the gas flow according to market prices and the infrastructure is necessary to facilitate this, in order to move to a competitive wholesale market in the EU.”
Ms. Beyer showed the differences in natural gas prices where there were flexible wholesale price gas markets across Europe.
“Public and private budgets are constrained,” she explained. “Access to finance has become more difficult. It is not taken for granted that investments will be taken by the market operators themselves.”
“On the EU side,” she continued, “we have not had implements for risk mitigation and are not able to support the construction and deployment of projects. This is a story about creating a stability and incentivizing public and private investment, along the north and south natural gas connections, and the Southern Corridor.”
She said that European support had been designed to complement traditional support, project financing and access to risk capital.
Andy Brogan, Global Oil and Gas Transactions Leader at Ernst & Young, weighed in.
“Given those volumes of capital requirements, will companies invest?” he asked. “Secondly, if they can’t find the money internally, where’s it going to come from? Industry has not been particularly innovative when it comes to financing, given the level of disruption and the huge quantities of capital required.”
Graham Weale, Chief Economist, RWE AG, pledged to tell about an area where there was more certainty. “Europe is dead set on a renewables decarbonization path,” he explained. “EUR 1000 billion are required for CO2 free power over 10 years.”
He said renewables were driving down the price of natural gas, increasing volatility.
Mr. Weale said he had a single message: “Everything that we see points to increased regulation. The renewables industry will be based on low risk feed in tariffs, and guaranteed returns. The pendulum is swinging towards liberalized markets, increasing risk taking.”
The returns for renewables were guaranteed, he said, therefore the investments were forthcoming.
“But the costs of decarbonization may require further market changes,” he said. “When affordability comes higher on the radars screen, the European Commission will have to look at a more market-based approach.”
Conference Chair James Ball asked if the industry would get new project finance mechanisms.
“There’s a lot of money looking for a home,” commented Ernst & Young’s Andy Brogan. “There’s a requirement of flexibility from the industry and from the regulatory bodies, to put together a regulatory framework that can provide flexibility long term.”
“Flexibility for new kinds of instruments,” added Silvia Beyer, mentioning a project bonds initiative. “The EC has launched a pilot phase, and must test the market on these bonds. Before 2014 we want to test the market in the transport and telecom sectors. There’s a trend to go in long and stable returns. One has to see what kind of financing needs there are in the different projects. We may need a wider basket to address project financing needs.”
“Energy is a real business and has real returns,” she said.
Conference Chair James Ball summed up: “There’ s lots of money sloshing around there, but can’t it get through the dysfunctional banking system between it, so we need to find more innovative ways of connecting with financing.
“Secondly, if you’re going to assume renewables you’re going to have to realize that security chains have tails - all the infrastructure and investment that you take for granted - the backup for gas is essential and has been largely ignored by the policy makers.”